A closer look at Fed Rates

On Aug 17, 2007 before the US markets open, the Fed surprised everyone by reducing its discount rate from 6.25% to 5.75%. The Fed Funds rate remained at 5.25% and the Prime rate has also not changed, and stayed at 8.25%. As a result, the markets were greatly encouraged and rallied.

What do these rates mean?

Fed Funds Rate: The Fed Funds Rate is the overnight interest rate at which U.S. banks lend to each other their excess reserves held on deposit at the U.S. Federal Reserve.

Discount Rate: The Discount Rate is the overnight rate at which U.S. banks can borrow from the U.S. Federal Reserve.

Prime Rate: The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually business customers). The rate is almost always the same among major banks. Adjustments to the prime lending rate are typically made by banks at the same time.

What does the discount rate reduction mean?

The cost to banks for borrowing from the Fed has dropped, while the rate they earn loaning to each other and the rate they charge their customers has not dropped. That means they make more money when they loan today than they did last week. That means banks are somewhat more likely to lend and that the economy will be somewhat more liquid. That presumably will help reduce investor worries in the bond and stock markets over the liquidity aspects of the current debt crisis.

Performance of American & European Markets and related Unit Trusts during the Jul - Aug 2007 correction

The correction in the US and Latin America started from a peak on 19 July 2007 and 23 July 2007 respectively to a low on the 16 Aug 2007. Below is a summary of returns of the US markets and related unit trusts during this period (% in brackets are the YTD returns from 29 Dec 06 till 16 Aug 07):

United States
Dow Jones Industrials -11.5% (+2.3%)
S&P 500 -9.1% (-0.5%)

Infinity US 500 Stock Index -8.2% (-0.9%)
Aberdeen American Opps -8.2% (-0.1%)
Fidelity America A SGD -8.8% (-1.0%)

Latin America
MSCI EM Latin America -23.1% (+4.9%)

Schroder ISF Latin America A Acc USD -19.8% (+9.1%)
Franklin Templeton Latin America -19.8% (N.A.)
ABN Amro Latin America Eqty USD -23.6% (+15.1%)
Fidelity Latin America USD -24.9% (+0.3%)

Brazil
Bovespa -17.3% (+8.0%)

ABN Amro Brazil USD -27.1% (+8.1%)

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The correction in Europe started even earlier from a high on 16 July to a low on 16 Aug. Below is a summary of returns of the US markets and related unit trusts during this period (% in brackets are the YTD returns from 29 Dec 06 till 16 Aug 07):

Europe
MSCI Europe -14.2% (-1.9%)
DJ Stoxx 50 -11.3% (-4.1%)

Aberdeen European Opps -12.4% (-1.2%)
Infininty Euro Stock Index -12.9% (0%)
Franklin Templeton European Eqty -12.9% (-1.5%)
DBS Shenton Greater Europe -13.3% (+0.2%)
Fidelity European Gth EUR -13.3% (-1.9%)
PRU Pan European -13.9% (+0.7%)
Fidelity Euro Agg EUR -14.9% (-2.6%)

FTSE 100 -11.8% (-5.8%)
FTSE All Share -12.4% (-5.9%)

Germany
DAX -9.0% (+10.2%)
MSCI Germany -12.9% (+9.5%)

Fidelity Germany EUR -14.5% (+6.2%)

France
CAC 40 -13.2% (-5.0%)
MSCI France -16.3% (-4.2%)

Fidelity France EUR -14.5% (-2.2%)

Spain & Portugal
Madrid Gen -7.4% (-1.0%)
MSCI Spain -9.4% (+1.1%)
MSCI Portugal -12.4% (+8.6%)

Fidelity Iberia EUR -12.2% (N.A.)

Performance of Asian Markets and related Unit Trusts during the correction from 24 Jul 07 to 17 Aug 07

The current correction caused by the sub-prime & credit crisis in the US should not be hitting the Asian markets that hard, but somehow it did, and the Asian markets tumbled even more than the US markets. I've summarized the major Asian markets' and selected unit trusts' performances during this period (% in brackets are the YTD returns from 29 Dec 06 till 17 Aug 07):

Asia ex Japan
MSCI Asia ex Japan -17.6% (+5.2%)

Aberdeen Pacific Eqty -14.4% (+3.8%)
Lion Capital Asia Pacific -16.9 (+4.8%)
UOB United Asia Fund -20.1% (+9.3%)

Australia
All Ordinaries -12.3% (+0.3%)
MSCI Australia -20.8% (+0.4%)

Fidelity Australia AUD -11.0% (+0.6%)
Lion Capital Australia -21.7% (+2.1%)

Singapore
STI -14.6% (+4.9%)
MSCI Singapore -16.3% (+5.7%)

DWS Singapore Eqty -13.6% (+14.8%)
Aberdeen Singapore Eqty -13.9% (+7.2%)
Lion Capital Singapore Trust -14.3% (+9.8%)
DBS Shenton Thrift -16.9% (+8.7%)

Malaysia
KLSE -14.4% (+8.7%)
MSCI Malaysia -17.3% (+10.0%)

Aberdeen Malaysia Eqty -11.6% (+9.3%)
Fidelity Malaysia USD -15.4% (+14.3%)
DBS Malaysia Eqty -18.4% (+7.5%)
Lion Capital Malaysia -25.5% (+17.2%)

Thailand
SET -13.9% (+11.6%)
MSCI Thailand -17.7% (+16.8%)

Aberdeen Thailand Eqty -12.1% (+8.9%)
Lion Capital Thailand -14.0% (+17.7%)
Franklin Templeton Thailand -14.3% (+11.6%)
Fidelity Thailand USD -17.4% (+16.7%)

Indonesia
Jakarta Composite -20.5% (+5.7%)
MSCI Indonesia -22.4% (-1.4%)

Aberdeen Indonesia Eqty -17.3% (-2.5%)
Fidelity Indonesia USD -24.7% (-6.0%)

Philippines
PSE -22.2% (-3.3%)
MSCI Philippines -26.2% (+1.3%)

Lion Capital Philippines -23.8% (+2.5%)

Korea
KOSPI -17.8% (+14.2%)
MSCI Korea -20.4% (+9.5%)

Franklin Templeton Korea -13.1% (+15.1%)
Lion Capital Korea -17.4% (+14.1%)
Fidelity Korea USD -19.3% (+14.7%)

India
SENSEX -10.5% (+2.6%)
MSCI India -12.9% (+9.3%)

Aberdeen India Opportunities -8.7% (+7.0%)
First State Reg India -8.9% (+7.6%)
Lion Capital India -11.2% (+7.3%)

China, HK, Taiwan (Greater China)
Shanghai Composite +10.6% (+74.0%)
Hang Seng -13.2% (+2.1%)
Taiwan Weighted -17.0% (+3.4%)
MSCI China -18.4% (+9.6%)
MSCI Taiwan -18.0% (-3.0%)

Aberdeen China Opp -11.3% (+10.0%)
Fidelity China Focus SGD -12.7% (N.A.)
Lion Capital Taiwan -14.1% (-0.9%)
DWS China -14.5% (+19.4%)
Fidelity Taiwan USD -14.8% (+3.4%)
First State Reg China -15.1% (+16.2%)
Lion Capital China Growth -15.4% (+13.4%)
SGAM Golden China SGD -15.9% (+11.2%)

Japan
Nikkei 225 -15.2% (-11.3%)
MSCI Japan -11.3% (-7.5%)

Lion Capital Japan Growth -9.0% (-7.9%)
DBS Japan Growth -10.9% (-6.5%)

Thus the top ranking markets in the following order for the duration of the correction (YTD returns in brackets):

1. Shanghai Composite +10.6% (+74.0%)
2. India SENSEX -10.5% (+2.6%)
3. Aust All Ordinaries -12.3% (+0.3%)
4. Hang Seng -13.1% (+2.1%)
5. Thai SET -13.9% (+11.6%)
6. KLSE -14.4% (+8.7%)
7. STI -14.6% (+4.9%)
8. Nikkei 225 -15.2% (-11.3%)
9. Taiwan Weighted -17.0% (+3.4%)
10. MSCI Asia ex Japan -17.6% (+5.2%)
11. KOSPI -15.1% (+18.0%)
12. Jakarta Composite -20.5% (+5.7%)
13. Philippine SE -22.2% (-3.3%)

As can be expected, Aberdeen came up tops with their 'value' style investing. When markets rally, Aberdeen will underperform the rest, but when things go bad, you can expect them to outperform. Updated using Aug 17 values.